Student Loan Options: What is Refinancing vs. Consolidation?

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner and stress less about student loan debt. Read the other posts in the series here—and get all the info you need to make intelligent decisions about your student loans. And while you’re at it, check out SoFi’s new Student Loan Debt Navigator tool to assess your student loan repayment options.

Student loans have a way of making you feel powerless. But the truth is, you have more control than you think. That’s what our Student Loan Smarts series is all about—helping you understand all of your options so you can make decisions that fit with your financial goals.

One of those options? Choosing to consolidate or refinance student loans. But what is consolidation, what is refinancing, and how do you know which one (if either) is right for you?

This is a somewhat complicated question, especially since these terms are sometimes used interchangeably. For example, consolidation simply means combining multiple student loans into one loan, but you get different results by consolidating with the federal government vs. consolidating with a private lender. Student loan refinancing is when you apply for a loan under new terms and use that loan to pay off one or more existing student loans.

Consolidate vs. Refinance. Let’s break it down.

Here’s a simple overview of the different types of student loan consolidation, how they differ from student loan refinancing, and how to evaluate whether you should do one of these things.

Federal loan consolidation

Federal loan consolidation is offered by the government and is available for most types of federal loans—no private loans allowed. When you consolidate with the government, your existing federal loans are combined into one new loan with a new rate, which is a weighted average of your old loans’ rates.

This option doesn’t save you any money, but there are still a few potential benefits:

1. Fewer bills and payments to keep track of each month.

2. The ability to switch out older, variable rate federal loans for one fixed rate loan, which could protect you from having to pay higher rates in the future if interest rates go up. (Note: the last variable rate federal student loans were disbursed in 2006. Since then, all federal loans have been fixed rate.)

3. Lower monthly payments. But beware—this is usually the result of lengthening your payment term, which means you’ll actually have to pay more interest over the life of the loan.

Private loan consolidation

Like federal consolidation, a private consolidation loan allows you to combine multiple loans into one, and offers the same potential benefits listed above. However, the interest rate on your new, consolidated loan is not a weighted average of your old loans’ rates. Instead, a private lender will look at your track record of handling debt and other financial information to give you a new (ideally lower) interest rate on your consolidation loan.

Bottom line: when you consolidate student loans with a private lender, you are also in fact refinancing those loans.

Student loan refinancing

As noted above, student loan refinancing is when a new loan is used to pay off one or more existing student loans. If your financial situation has improved since you first signed on the dotted line, you may be able to refinance student loans at a lower interest rate, which can allow you to:

5. Enjoy the benefits of consolidation, including one simplified monthly bill.

Unlike consolidation, student loan refinancing is only available from private lenders. And while most private lenders will only refinance private loans, a few, including SoFi, will refinance both private and federal student loans, so you can consolidate all of your loans into one.

Before you combine federal and private student loans, be aware that federal loans offer certain benefits and protections, such as Public Service Loan Forgiveness and income-driven repayment plans, which do not transfer to private lenders. If you’re considering refinancing, you should first find out if any of these benefits apply to you.

If you don’t anticipate needing or qualifying for federal loan benefits, getting a lower rate can save you a significant sum..

So should you consolidate, refinance – or neither? The decision depends a lot on your specific situation. Do you qualify to refinance at a lower rate? Do you plan to take advantage of federal loan benefits? Answering these questions will go a long way to helping you make the right choice.

You may not be able to change the fact that you have student loans, but you can make smart decisions about them. And that’s what ultimately gives you power over your debt.

Editor’s Note: This is an updated version of a post we originally published in November 2013. We welcome new comments and questions below.

ABOUT Dan MacklinTwitter: @macklindan
Dan Macklin is a co-founder of SoFi and former VP of Community & Member Success. Dan holds an M.S., Management degree from the Stanford Graduate School of Business where he was a Sloan Fellow. He also holds a B.A. in Business Economics from University of Durham in England.

I’m looking into lowering my monthly payments and was curious about my options…through refinancing or consolidating is there a way to combine private and federal loans together so I’m making one payment each month?

Anna – I have a loan with ACS that was consolidated at 8.5% in 2001. I understand that because it was already consolidated once, I can’t do that again. But, is it possible to go to another lender for a lower interest rate? If not, do you know of any way I can get the interest rate down?

Fantastic goods from you, man. I have understand your stuff previous to and you are simply extremely great.

I actually like what you’ve obtained here, really like what you
are saying and the way in which you are saying it. You’re making it enjoyable
and you still take care of to stay it wise. I can’t wait to read far more from you.
That is really a terrific website.

I currently have loans through 2 lenders. I have been using the IBR for both. I am interested in combining loans and have having to worry that my payment will go up considerably every year and not having to deal with the lengthy IBR applications every year. Can SoFi help me?

Thanks for your comments and for reading out blog post! Our Loan Operations team would be happy to help answer questions about consolidating your loans and how pricing can change. Since everyone has a slightly different situation, we recommending speaking to them about qualifying for SoFi and how our processes work. You can reach them by phone at 855-456-7634, or fill out our straightforward application form here: https://www.sofi.com/b/registration

I currently have 9 individual parent plus loans and was considering consilidating/refinancing a portion of theses loans totaling approx $180k. If I reduce the total number of installment loans from 9 individual to 5 ( keeping four of the low rate plus loans + consolidating/refi remaining 5 loans ), will have any bearing on my credit score either positive or negative ?

Hi Stephanie,
Thanks for reaching out to us and for reading our blog! Your question would be better answered by the credit bureaus, SoFi wouldn’t be able to opine either way on how they look at your situation and any resulting action. If you’re interested in consolidating or refinancing your loans with SoFi, check out our FAQs page or call our Customer Service team at (855) 456-SOFI

Hey Becky,
To apply for consolidation online, go to https://www.sofi.com/b/registration
You can also call our loan consultants at 855-456-SOFI to discuss your specific situation and if SoFi is the right option for you. Best of luck!

This provided great information. I have federal and private loans with Navient. With good to excellent credit, I want to lower my debt to equity ratio as I got accepted into business school and am looking at my financing options. Does it make sense to refinance the 2 private loans I have that are in repayment?

Hi Teri,
Give us a call at 855-456-SOFI and our loan consultants can walk you through the process to see if makes sense for you. We also have another blog post about consolidating federal and private loans where you can get some more information.
Hope that helps, best of luck!

Hi there –
If you have student and credit card debt, it isn’t possible to consolidate them into one loan. However, refinancing a student loan and taking out a personal loan to cover credit card debt can be a good option. Give our loan consultants a call at 855-456-SOFI, they’d be happy to provide some guidance around your options.

Hello! Hope you can help – I’m so confused. I have about 6 Federal Loans (sub and unsub) that I’ve bene paying down for the last 5 years. I’ve been hesitant to look into refinancing or consolidating because the credit lines on statements, which I tend not to look at and have just been shoulder to the grind stone automatic payments, are listed with low APRs (between 5%-8%). If this were revolving credit I can’t imagine why I would refinance as, on average, I have a really good overall APR.

But… I am fundamentally misunderstanding something. Over the past 5 years I’ve paid about $21,000 of which $8000 is in interest. I feel like that means of the +/- $300 / mo. I’m paying, nearly 30% (like a default loan rate!) of that goes towards interest alone. I imagine this has to do with daily compound interest – but it almost feels like I’m making installment payments. I’m embarrassed for not having reached out earlier – I’m about half way through expected loan term of 10 years…. but I also feel really deceived and would love to avoid paying so much in interest in the remainder of my term. Is there hope for me? Or is this what an avg 7% APR on typical student loans looks like?

Can I just say what a relief to locate somebody who actually knows what theyre talking about on the web. You unquestionably know how to bring an issue to light and make it significant. Additional persons ought to read this and fully grasp this side of the story. I cant believe youre not far more preferred mainly because you undoubtedly have the gift.

Have you ever wondered who posts some of this stuff that you come across? Honestly the internet used to be like a different place, although it seems to be changing for the better. What are your thoughts?

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

✝ To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.